Recently it was reported that the Securities and Exchange Commission would not be able to meet the deadlines as established in the JOBS Act for crowdfunding guidelines and regulations — indeed, the SEC is still working on rules pursuant to Dodd-Frank, a law passed nearly two years ago! Although it is beginning to look more and more likely that the entrepreneurial community won’t see crowdfunding until early 2014 (as a safe estimate), what are some of the guidelines, regulations, and features the SEC should be discussing implementing in order to make crowdfunding a success once we finally do see it?
First, the SEC should create or encourage private industry to create standardized national databases of portals, issuers, and investors, for the benefit of all those parties as well as regulators. A national database of funding portals and issuers could be searchable and indexed by characteristics, such as location, industry, or minority or women-run — this could help investors who are looking to invest locally, or in a particular industry, or to support minority- or women-owned businesses. On the other side, a national database of investors could help funding portals with their duty to ensure that a person looking to invest in a crowdfunded business is eligible to do so and hasn’t exceeded their investment limitations. Each portal could be required to update the database every time a person makes an investment — if a person invests up to his or her limit on one portal and it is recorded on a database, if that person signs up on another portal that portal will be able to check the database and see that the individual is not eligible to invest. If every portal is required to independently verify a person’s eligibility, instead of having a database to check against, it makes the burden on the portals that much more difficult and costly, and opens the door wider for persons looking to exceed their investment limitations. In any event, issuers should have safe harbors for substantial compliance in the event a handful of investors are found to not have been eligible to invest.
Second, the SEC should allow funding portals to exercise reasonable limitations on selecting companies seeking crowdfunding investment, without violating the JOBS Act’s provision against portals acting as unregistered “investment advisors”. Portals should be allowed, if they wish, to require that companies looking to sign up provide, for example, financial documentation above and beyond that required by the JOBS Act, which could bar companies without a track records and who might be regarded by some as too speculative, or reject companies that provide products that might be considered lewd or vulgar, such as a company that manufactures clothing printed with derogatory comments.
Third, the SEC should make solicitation and advertisement rules that take into account the likely prevalence of social media in the crowdfunding industry. Can a company give notice of their offering on Facebook or Twitter. What would a like on Facebook or a pin on Pinterest mean? The particular social networks may come and go, and rules must be written to reflect that, but guidelines on media must be set before crowdfunding begins in order to avoid having to write ad hoc rules once problems with crowdfunding and social media arise.
Finally, the SEC must balance the public’s right to have information in order to make an educated investment, and the reality that startups, when compared to emerging growth companies that make private offerings or are going IPO, are resource-poor, disorganized, and don’t have the same financial and business information to offer prospective investors. Startups just don’t have the information answer the detailed questions that Regulation D or S-1 offerings ask, and more importantly don’t have the money to pay lawyers to answer all those questions. All startups are speculative — the information startups should be required to provide to investors should answer the question of how speculative the venture is.